Price Is A Liar

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When I wrote “Fade The Rally” two weeks ago it was not a popular view. Technicians were wondering if a major bottom had been put in place. Two big down days in the NASDAQ later and they are starting to question whether it was a bear market rally.

The point I want to make is that without an overall view separate from price you are lost. There are a number of cliches in technical analysis such as “Don’t fight the trend” and “Price is truth”. But without a macro view it’s impossible to separate the wiggles from the primary trend.

For example, consider the tweet above from the technician Brian G. My purpose is not to pick on Brian but to point out what happens when price is your only barometer. In my opinion there is a high probability that Brian got overly bullish at the top of a bear market rally. Why? Because he is a pure technician focused only on price.

Unless you understand the macro narrative – what Jesse Livermore called “general conditions” – which is raging inflation, an asset bubble and an increasingly hawkish Fed, you inevitably would have been sucked in as well. On what basis could you have resisted if “price is truth”?

There are some technicians who never wavered from the idea that this was a bear market rally – but they couldn’t have done so based solely on price. They drew their lines differently because they were sneaking in contrarian macro assumptions without admitting it.

In sum, being exclusively focused on price is a recipe for getting sucked in by the wiggles and missing the primary trend. Technicians claim to be purely objective and base their views entirely on price action. Unfortunately, investing is a highly subjective art; there is no purely objective “view from nowhere”. That’s why different technicians looking at the same charts draw different lines – they’re relying on different (implicit) background assumptions. It’s only by having a macro framework that you can put the price action in perspective and stay focused on the primary trends.

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